Can you walk us through the objectives, strategy, and evolution of your expectations throughout the issuance process of your most recent transaction in the Samurai market?
The Japanese debt market is less vulnerable to volatility within the international financial markets as many of its investors are considered buy and hold. Moreover, monetary policy in Japan has driven yields to record lows, pushing investors to look at longer tenors and at transactions from foreign issuers.
Taking this into consideration, Mexico accessed this market back in June pricing a four-tranche deal totalling JPY135bn (US$1.25bn). This transaction was not only the largest Samurai deal for Mexico, but also for Latin America for an issuance that came without JBIC’s guarantee. The yield offered to investors was the lowest in history for such tenors.
Moreover, in this transaction Mexico introduced for the first time the new generation Collective Action Clauses (CACs) and ranking clause (adapted to the Japanese market), becoming the first country to introduce the new generation CACs under Japanese Law.
With this transaction, Mexico was able to fully complete its external financing requirements for 2016.
What were your initial expectations on demand and pricing for the transaction? Were these expectations met?
In terms of tenors, initially we announced the three and five-year tranches, however we received interest and reverse inquires for longer durations allowing us to offer 10 and 20-year tenors as well.
Offering a wide range of tenors helped access a wider set of investors and continued to consolidate an effective yield curve in the Japanese market all the way up to 20 years.
During the official marketing period which lasted 4 days, demand continued to grow, despite a tightening of the pricing range. Mexico took advantage of this strong demand to continue to tighten the price as well as upsize the transaction, which led to the country’s largest ever Samurai bond excluding JBIC’s guaranteed issuances, issued at historically low rates.
The transaction attracted more than 190 accounts, including several new investors that had not participated in previous Samurai transactions.
If Mexico had already completed its external funding needs for 2016 with previous transactions, what were the reasons behind the most recent benchmark-sized transaction from Mexico in the dollar market?
After having met the external financing needs for 2016 earlier in the year through the issuance of dollar, euro and yen-denominated bonds, Mexico returned to the international markets in August with a liability management transaction.
The transaction was announced as debt neutral from the beginning and allowed the government to extend the maturity profile of its external debt while reducing by 70% its foreign currency maturities due in 2017, which was equivalent to US$3.9bn prior to this transaction.
Mexico successfully issued US$2.7bn in the primary market to fully prepay a bond maturing in January 2017 for the same amount. This was possible by exercising the make-whole option.
The new dollar-denominated issue consisted of the re-opening of the on-the-run 10-year benchmark-sized (4.125% notes due 2026) for US$760mn and the issuance of a new 30-year benchmark-sized bond (4.35% notes due 2047) amounting to US$2bn.
The new issue represented the lowest 30-year coupon and lowest yield ever for a 10-year transaction paid by Mexico in the dollar market. The bond received approximately US$9bn in demand from more than 250 accounts.
What aspects do you consider when mandating banks for your transactions?
Considering the important role banks play when executing a transaction in the international markets, they are chosen based on their proposals and capabilities in general, including distribution and ability to execute the deal efficiently. In this sense, we give strong weight to the innovation and accuracy of the proposals presented.
Can you share your outlook on the government’s funding strategy for next year? To what extent has that strategy been influenced by economic and political headwinds?
Recent developments in the global economy has been characterised by two main elements: lower than expected global economic growth and frequent highly volatile events in the international financial markets.
These have been exacerbated by the fluctuations of commodity prices and by uncertainty regarding the monetary policy decisions of major central banks. In this context, the Federal Government has maintained flexibility to timely respond to prevailing conditions in the domestic and international financial markets.
As in previous years, the Federal Government will plan to fund most of its needs through the domestic debt market, and use the international markets as a complementary source of funding.
Domestic debt policy for next year will most likely continue following the flexible format adopted in recent years for syndicated auctions and the possibility of carrying out exchange and repurchase transactions as a liability management tool.
Depending on market conditions, the external debt strategy for next year will be focused on expanding and diversifying Mexico’s investor base as well as further developing benchmark-sized bonds, including the possibility of carrying out different liability management transactions to strengthen the external debt profile.
As we have done so far, we will continue to maintain close and constant communication with local and international investors to promote their participation in both the external and domestic debt instruments of the Federal Government.